|Business Credit Law and Regulations|
ECOA Still Prohibits Discriminating Against Applicant Requesting Credit
The terrorist acts of Sept. 11 have unified the country and patriotism has been brought to the forefront. Recent federal legislation, such as the Patriot Act, focuses on ways to combat terrorism, especially from the Middle East. The press has reported racial profiling, for example, where pilots are denying certain passengers to fly. May a credit professional refuse to extend credit to an applicant, say, a sole proprietor originally from the Middle East? The Equal Credit Opportunity Act (ECOA) says no. ECOA is a federal statute that prohibits credit grantors from discriminating in the granting of credit based on prohibited basis, and requires creditors to comply with certain notifications, and retain records. How does ECOA impact a credit professional's commercial credit decision making and notifications, especially post-Sept. 11?
A. What Is ECOA?
ECOA was enacted by Congress in 1989, and the Federal Reserve Board
issued Regulation B to implement ECOA in 1990. ECOA is a federal
statute that prohibits credit grantors from discriminating in the
granting of credit based on a prohibited basis, including race, color,
religion, national origin, gender, marital status or age (collectively
referred to under the regulations governing ECOA as the "Prohibited
Basis"). As ECOA is a federal statute, it applies to all states.
ECOA is intended to promote the availability of credit without regard
to characteristics that have nothing to do with creditworthiness. Creditors
are required to notify applicants of action taken on their applications,
and to retain records of credit applications.
1. Only Applies When "Credit" Is Considered To Be Extended
ECOA only applies when "credit" is considered to be extended. "Credit" is
defined as "the right granted a creditor to a debtor to defer
payment of debt or to incur debts and defer its payment or to purchase
property or services and defer payment therefore." Thus, a vendor
extending business credit on, for example, 30 day terms, can be reasonably
read as extension of "credit" under ECOA.
C. Notice Of Credit Decision And Statement Of Reasons: The 30/60/30 Day Rules
ECOA requires credit grantors provide written notification to applicants.
1. Notice of Adverse Action Within 30 Days
Under ECOA, a credit grantor must provide notice to the applicant of action taken with the request for credit within 30 days after a completed application received by the credit grantor. The possible actions under ECOA are (a) an adverse decision ("Adverse Action"), (b) a counteroffer, or (c) granting the credit requested.
Adverse Action is defined as:
If Adverse Action is taken, notice must be provided by the credit grantor to the applicant that the party has the right to request reasons for the Adverse Action in writing within 60 days of such action. See Attachment A. Notification may be done verbally if the application was verbally made, otherwise it must be done in writing. ECOA provides that the notice of Adverse Action must contain language advising of ECOA similar to that in Attachment A.
2. Credit Applicant's Request For Statement Of Reasons Within 60 Days
The applicant has 60 days from receipt of the credit grantor's Adverse Action letter to request an explanation of adverse ruling.
3. Credit Grantor's Statement Of Reasons Within 30 Days
If an applicant requests an explanation of Adverse Action within 60 days, the credit grantor is to provide a statement of reasons within 30 days. The credit executive is not required to provide specific reasons for the Adverse Action, but instead may provide language such as, "adverse credit history"; "lack of business experience"; "lack of working capital"; or "too much secured debt." One form of letter addressing the statement of reasons letter is provided as Attachment C.
C. Obtaining A Spouse's Guarantee
ECOA does not permit a credit grantor to require a spouse to sign a personal guaranty if that spouse is not directly involved with the applicant. A personal guarantee can be required only when an applicant does not meet the creditor grantor's scoring model for credit. If the business owner's spouse is not involved in the business and does not hold a position with the corporation, a personal guarantee that includes the spouse may be discriminatory.
D. Retention Of Records
ECOA requires credit grantors to retain records for applicants
denied credit. The records a credit grantor retains are the credit
application, the credit grantor's notification of action, the statement
of specific reasons for the adverse action and the applicant's written
statement alleging violation of ECOA.
E. ECOA In The Internet Age
The Internet is revolutionizing how the credit professional handles
credit transactions. Credit professionals are using the Internet
for a myriad of credit and financial functions, from credit research
and scoring, to automatic invoicing customers through their Web site,
to automatic payment posting. Credit departments are loading their
web pages with credit applications and guarantees for the customer
to retrieve. The electronic credit department has arrived.
1. E-Notification Of Adverse Action And Statement Of Reasons
ECOA requires a credit grantor give notification of Adverse Action. The ESign Act may allow a credit grantor to give electronic notification of Adverse Action and statement of reasons.
2. Storing Credit Applications Electronically
The E-Sign Act authorizes storing documents electronically. This means that a credit professional may store electronically the credit files of declined applicants.
F. Avoiding The ECOA Lawsuit: Steps To Comply
A paper trail demonstrating to disgruntled applicants (or their
counsel) or FTC audits that a credit grantor complies with ECOA can
be useful in keeping lawsuits at bay. To comply with ECOA, there
are several steps a credit grantor may consider adopting. These steps
assist the credit grantor in creating a paper trail evidencing compliance
What type of evidence may prove a violation of ECOA?
1. Overt Discrimination: When a credit grantor blatantly discriminates
on a prohibited basis. Expressions of a discriminatory preference
may constitute a violation of ECOA even if the credit grantor does
not act on the preference. The example post Sept. 11 where a credit
professional refuses to sell a sole proprietor of Middle Eastern
origin because of his origin.
I. Enforcement Of ECOA
Enforcement of ECOA may be through private lawsuit or through administrative enforcement. A creditor failing to comply with ECOA may be subject to civil liability for actual and punitive damages in either individual or class action lawsuits. Punitive damages are capped at $10,000 in individual lawsuits; and capped at the lesser of $500,000 or 1% of the creditor's net worth in class action lawsuits. Winning plaintiffs may also recover from the defendant reasonable attorneys' fees and costs. The Federal Trade Commission regulates ECOA.
J. Post Sept. 11, The Credit Professional Cannot Discriminate With Credit Decision
Post Sept. 11 has caused us to consider those around us in different a light, given the continued threat of domestic terrorism. The country has come together on a united and patriotic way. On the commercial credit front, post Sept. 11 neither the U. S. Congress nor the FTC have changed ECOA's prohibition of denying credit based on national origin or race, for example, where a sole proprietor from the Middle East requests commercial credit.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Spring 02